LDP majority win in upper house priced into the markets

Today’s UK opening call provides an update on:

• LDP majority win in upper house priced into the markets;

• Shinzo Abe now able to focus on his third arrow, reforms;

• Housing data in focus as rising mortgage rates threaten the recovery;

• Earnings season gets into full swing with McDonalds and Netflix reporting.

European indices are expected to open higher on Monday, following a mixed night in Asia which saw the Nikkei 225 after Shinzo Abe’s LDP party secured an expected majority in the upper house.

There was never any real doubt that the LDP would secure the majority in the upper house, given the party’s current approval ratings, so to an extent the victory was already priced in. The win in the upper house for Abe’s LDP party will now allow him to push on with implementing his third and final arrow, in his attempt to revive the Japanese economy which has been stagnated for the last two decades.

The first two arrows, being fiscal and monetary stimulus, aimed at providing a boost to the economy and hitting the new 2% inflation target, are already underway. The third arrow, reforming the economy to increase its competitiveness, was always going to be the most difficult for Abe, although a majority in both the upper and lower houses now should make things much easier. Had the LDP not won a majority in this election, the success of “Abenomics” would have been under serious threat.

We could be in for a relatively quiet start to the week, if the economic and earnings calendars are anything to go by. The only noteworthy economic release on Monday is the US existing home sales, which are expected to rise by 0.5% in June to 5.26 million. The housing market has been a real strong point for the US economy this year, although the improvement seen here may come under significant pressure in the coming months as mortgage rates begin to rise.

The recent jump is US Treasury yields will have a significant impact on home owners mortgage rates in the second half of this year, which could act as a deterrent anyone considering buying a house. The low mortgage rates over the last couple of years have acted as a real incentive for people to get back on the housing ladder, however with rates now on the rise, they may start to think twice. That said, it is probably too early for this to have any impact on today’s figure. It’s more something to keep an eye out for in the data in the months ahead.

Corporate earnings season is likely to be the key focus this week, with the economic calendar looking quiet on most days. Today, we have McDonalds reporting second quarter earnings before the open, followed by Netflix after the closing bell. Earnings season then gets into full swing tomorrow, with Apple, the biggest component of the S&P, reporting its second quarter earnings.

As we’ve mentioned over the past couple of weeks, while earnings, as always, are going to be important, there’s likely to be more focus on the outlook for the companies reporting, given the significant headwinds facing the US in the next 12 months. With the Fed looking to taper its asset purchases, consumers are going to be faced with higher interest rates coupled with rising fuel costs which could really squeeze disposable incomes.

Ahead of the open we expect to see the FTSE up 5 points, the CAC up 9 point and the DAX up 20 points.